Verilink Reports First Quarter 2006 Financial Results

Verilink Reports First Quarter 2006 Financial Results 
Company Reports Revenues of $11.0 Million and Amends Senior Notes 
CENTENNIAL, CO -- (MARKET WIRE) -- 10/31/05 --  Verilink Corporation
(NASDAQ: VRLK), a leading provider of broadband access solutions,
today reported its financial results for the first fiscal quarter
ended September 30, 2005. 
Net sales were $11.0 million, a decrease of 11% year over year from
$12.3 million in the same period of fiscal 2005. Net loss computed in
accordance with generally accepted accounting principles (GAAP) for
the first quarter of fiscal 2006 was $1.9 million, or $(0.08) per
share, compared to net loss of $24.5 million, or $(1.19) per share in
the first quarter of fiscal 2005. 
First quarter GAAP results included acquisition-related and other
items totaling $1.1 million, which includes stock based compensation
of $552,000 due to our adoption of SFAS No. 123R, Share Based
Payment, as of July 2, 2005 and intangible assets amortization of
$564,000. Excluding the effects of these items, non-GAAP loss was
$815,000 or $(0.04) per share, compared to a non-GAAP loss for the
first quarter of fiscal 2005 of $3 million or $(0.14) per share. For
the year-ago quarter, the net adjustment to reconcile to the GAAP net
loss totaled $21.5 million, which included a $20 million charge for
impairment of goodwill, intangible assets amortization of $572,000,
restructuring charges of $443,000, compensation expense of $233,000
related to restricted stock awards, and direct acquisition costs paid
and expensed of $287,000 (see "Use of Non-GAAP Financial Measures"
"Revenues were down sequentially due to various factors, primarily
the timing of orders from a large carrier customer and our focus to
improve gross margins, which resulted in our decision to forego
lower-margin business," stated Leigh S. Belden, President and CEO of
Verilink. "Despite the lower revenues, we were able to improve gross
margins by 350 basis points, reduce non-GAAP operating expenses by
$1.3 million and substantially narrow our non-GAAP operating loss on
a sequential basis as a result of actions we took to accelerate our
return to profitability. From a business development standpoint, we
acquired the ArcaDACSTM Digital Cross Connect and SechtorTM 300
Multiservice Edge Concentrator product lines from Zhone to ensure
continuity and expansion of our footprint with our largest customer,
as well as to extend our offering across the "last mile" from the
customer premise to the network edge." 
First Quarter 2006 Summary: 

--  Revenues of $11.0 million, an 11% decrease from Q1 2005
--  Improved gross margin to 38%, up 350 basis points sequentially
--  Reduction in operating expenses of $1.3 million, net of amortization
    and stock based compensation
--  Significant progress made in the Company's wireless business with the
    qualification of the NetPath(TM) 2000 with major wireless carriers;
    expansion of distribution channel with several major partners added during
    the quarter
--  Acquired the ArcaDACS 100 and Sechtor 300 product lines from Zhone
    Technologies, Inc. effective as of October 1, 2005, providing continuity
    with the Company's largest customer, gaining new customers, and improving
    product line gross margin in future periods

Amendment of Senior Convertible Notes and Related Documents 
Verilink and the holders of its senior secured convertible notes
issued March 21, 2005 have agreed to reduce the "target working
capital" amounts under the terms of the notes to $6.5 million for the
quarter ended September 30, 2005, and for subsequent quarters, to
$6.8 million less 80% of the principal amount of any notes redeemed
or converted subsequent to the date of the amendment plus 80% of the
principal amount of any newly issued notes from the exercise of the
holders' right to purchase additional notes. Under the terms of the
notes, if the Company's tested working capital as of the end of a
fiscal quarter does not meet the target working capital amount, the
holders of the notes may require the Company to make certain
additional principal payments on the notes. 
Verilink has also agreed to apply 50% of the net proceeds (after
satisfaction of the first mortgage commissions, and closing costs)
from a sale of its Explorer Boulevard property in Huntsville, Alabama
to reduce the outstanding principal amount of the notes. Verilink has
agreed to reduce the exercise price of the warrants for 830,563
shares of common stock issued in connection with the initial issuance
of the notes to $.93 per share of common stock. 
As part of the initial purchase of these notes and warrants in March
2005, the holders acquired additional investment rights to purchase up
to an aggregate of $5 million in principal amount of additional
notes. The Company has agreed to reduce the conversion price of the
additional notes that would be issued if the holders exercise their
additional investment rights to $1.00 per share of common stock, and
to extend the expiration of the holders' right to exercise their
additional investment rights to June 29, 2006. The conversion price
of the currently outstanding $8 million principal amount of notes is
$3.01 per share and has not been amended. 
The amendments also include revisions to the default and restricted
payment provisions of the notes and certain other changes to the
transaction documents, which will be reported in a Current Report on
Form 8-K. 
Conference Call Information 
Verilink will hold its first quarter conference call on Thursday,
November 3rd at 5:00 p.m. ET/3:00 p.m. MT. Investors are invited to
listen to a live audio web cast of the conference call by accessing
the Investor section of the company's web site at The web cast replay will be available
on-line following the conference call at approximately 7:00 p.m.
Eastern Time. 
Use of Non-GAAP Financial Measures 
Non-GAAP income excludes stock based compensation, intangible asset
amortization, other acquisition-related expenses, impairment charges,
restructuring charges, and other items and is not a measure of
financial performance under GAAP and should not be considered a
substitute for or superior to GAAP net income or loss. Verilink's
management uses non-GAAP income as a financial measure to evaluate
operating performance. Management believes this measure presents the
Company's results on a more comparable operational basis by excluding
certain non-cash expenses and amortization expense, non-operational
expenses associated with mergers and acquisitions, and significant
and unusual non-recurring items as well as stock-based compensation
charges under newly implemented accounting standards. Other companies
may calculate non-GAAP income in a different manner, so this measure
may not be comparable to similar measures presented by other
companies. A reconciliation of Verilink's GAAP net income (loss) to
non-GAAP income (loss) is set forth below. 
About Verilink Corporation 
Verilink Corporation (NASDAQ: VRLK) is a leading provider of
next-generation broadband access solutions for today's and tomorrow's
networks. The company develops, manufactures and markets a broad
suite of products that enable carriers (ILECs, CLECs, IXCs, and IOCs)
and enterprises to build converged access networks to deliver
cost-effective next-generation communications services to their end
customers. The company's products include a complete line of VoIP,
VoATM, VoDSL and TDM-based integrated access devices (IADs), optical
access products, wireless access devices, and bandwidth aggregation
solutions including CSU/DSUs, multiplexers and DACS. The company also
provides turnkey professional services to help carriers plan, manage
and accelerate the deployment of new services. Verilink is
headquartered in Centennial, CO (metro Denver area) with operations
in Madison, AL and Newark, CA and sales offices in the U.S. and
Europe. To learn more about Verilink, visit the company's website at 
Note: Except for the historical information contained herein, the
matters set forth in this press release, including statements as to
the expected benefits of acquisitions, future product offerings,
expected synergies, cost savings, discussions with lenders seeking
relief, and margins, are forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to
differ materially, including, but not limited to, the potential
impact on the Company's liquidity and operations in the event of
default of the Company's debt; the ability to successfully integrate
acquisitions and achieve expected synergies; the ability of the
combined company to develop and market successfully and in a timely
manner new products and to predict market demand for particular
products; the impact of competitive products and pricing and of
alternative technological advances; the ability to increase sales of
acquired product lines; the sufficiency of cost-saving activities;
sufficient cash flow to fund operations and lower than expected cash
flows from operations; risks associated with the Company's working
capital deficiency and "going concern" paragraph in the report of
independent registered public accounting firm for the audited fiscal
2005 financial statements; possible negative effects on our customer
base, employees and our ability to obtain additional financing;
fluctuations in operating results and general industry, economic and
internal controls; the impact of price and product competition; the
impact of customer concentration and the financial strength of
customers; and changes in demand for the Company's products. A
detailed discussion of these and other risks and uncertainties that
could cause actual results and events to differ materially from such
forward-looking statements are included in Verilink's Annual Report
on Form 10-K for the fiscal year ended July 1, 2005. These
forward-looking statements speak only as of the date hereof. Verilink
disclaims any intention or obligation to update or revise any
forward-looking statements. 
Verilink, the Verilink logo are registered trademarks of Verilink
Corporation. Larscom is a registered trademark of Larscom
Incorporated. All other trademarks or registered trademarks are the
property of the respective owners. 
*T                          VERILINK CORPORATION 
GAAP Condensed Consolidated Statements Of Operations 
(Unaudited, in thousands, except per share amounts) 
Three Months Ended 
September 30,  October 1, 
2005          2004 
--------      --------
Net sales: 
Product                                          $  8,411      $  9,718 
Service                                             2,557         2,566 
--------      -------- 
Total net sales                                 10,968        12,284 
--------      --------
Cost of sales: 
Product                                             5,643         7,531 
Service                                             1,158           964 
--------      -------- 
Total cost of sales(1)                           6,801         8,495 
--------      --------
Gross profit                                           4,167         3,789
Operating expenses: 
Research and development(2)                         1,467         2,252 
Selling, general and administrative(3)              3,530         5,107 
Amortization of intangible assets                     564           572 
Impairment charge related to goodwill                  --        19,984 
Restructuring charges                                  --           443 
--------      --------
Loss from operations                                  (1,394)      (24,569)
Interest and other income, net(4)                        165           213
Interest expense                                        (702)         (115) 
--------      -------- 
Loss before provision for income taxes             (1,931)      (24,471)
Provision for income taxes                                --            -- 
--------      -------- 
Net loss                                         $ (1,931)     $(24,471) 
========      ======== 
Net loss per share - basic and diluted              $  (0.08)     $  (1.19) 
========      ======== 
Shares used in per share calculation - basic and
 diluted                                              23,145        20,608 
========      ======== 
(1) Cost of sales includes the following: 
Stock based compensation                     $     85      $     15 
Retention bonuses accrued                          --            12 
--------      -------- 
$     85      $     27 
========      ========
(2) Research and development expenses include 
the following: 
Stock based compensation                     $     66      $     98 
Retention bonuses accrued                          --            29 
--------      -------- 
$     66      $    127 
========      ========
(3) Selling, general and administrative expenses 
include the following: 
Stock based compensation                     $    401      $    120 
Retention bonuses accrued                          --            45 
Direct acquisition related expenses expensed       --           287 
--------      -------- 
$    401      $    452 
========      ========
(4) Interest and other income, net includes the 
Income from reduction in convertible note 
due to accrual of retention bonuses noted 
above                                       $     --      $     86 
========      ======== 
Reconciliation of GAAP Net Income (Loss) to 
Pro Forma Non-GAAP Income (Loss) 
(Unaudited, in thousands) 
Three Months Ended 
September 30,        October 1, 
2005                 2004 
----                 ----
GAAP net income (loss)                       $  (1,931)         $ (24,471)
Acquisition-related and other items:
  Stock based compensation                         552                233
  Amortization of acquired intangible assets       564                572
  Impairment charge related to goodwill             --             19,984
  Restructuring charges                             --                443
  Direct acquisition costs paid and expensed        --                287
  Retention bonuses accrued in connection 
with XEL acquisition, net of impact from 
reduction in convertible notes                   --                 -- 
---------          ---------
Pro forma non-GAAP income (loss)             $    (815)         $  (2,952) 
=========          ========= 
Pro forma non-GAAP adjustments: The pro forma non-GAAP adjustments above
are based on our unaudited consolidated statements of operations for the
periods shown. These adjustments relate to stock based compensation
recorded as a result of our adoption of SFAS No. 123R, Share Based
Payment, as of July 2, 2005; compensation expense recorded from stock
and restricted stock grants awarded following the XEL acquisition;
compensation expense related to bonuses paid to certain XEL employees
after the acquisition, net of impact on convertible notes payable; other
intangible assets recorded as the result of the acquisition of TxPort,
Inc. in November 1998, the acquisition of the 6000/8000 IAD product line
in January 2003, the acquisition of the Miniplex product line in July
2003, the acquisition of XEL Communications, Inc. in February 2004, and
the acquisition of Larscom Incorporated in July 2004; impairment charges
related to goodwill; restructuring charges related to the consolidation
of certain operations, administrative, and engineering functions; and
direct acquisition costs paid and expensed related to the Larscom
acquisition. Verilink has chosen to provide this supplemental information
to investors to enable them to perform additional comparisons of operating
results and to illustrate the results of on-going operations. Please see
previous discussion regarding the use of non-GAAP measures. 
GAAP Condensed Consolidated Balance Sheets 
(Unaudited, in thousands) 
September 30,   July 1, 
2005        2005 
--------    -------- 
Current assets:
  Cash and cash equivalents                           $  2,502    $  3,504
  Restricted cash                                          333         333
  Accounts receivable, net                               7,914      10,068
  Inventories, net                                       5,145       5,256
  Other current assets                                     786         744 
--------    -------- 
Total current assets                                16,680      19,905
Property held for lease, net                             6,027       6,076
Property, plant and equipment, net                       1,462       1,697
Goodwill                                                 1,114       1,114
Other intangible assets, net                            12,689      13,253
Other assets                                               283         283 
--------    -------- 
Total assets                                      $ 38,255    $ 42,328 
========    ======== 
Current liabilities                                   $ 18,856    $ 20,792
Long-term liabilities                                    4,937       5,764
Stockholders' equity                                    14,462      15,772 
--------    -------- 
Total liabilities and stockholders' equity        $ 38,255    $ 42,328 
========    ======== 
Tested Working Capital 
(as defined in the Company's Senior Convertible Notes) 
The terms of the Company's senior convertible notes require the Company to
include the amount of its "tested working capital," as defined in the
senior convertible notes, in the quarterly announcement of its operating
results. At September 30, 2005, tested working capital was $6.77 million,
which exceeds the $6.5 million target under the terms of the notes as
amended. Tested working capital is a non-GAAP financial measure and is not
provided as a measure of the company's operating performance or liquidity
and is not used by the company as a measure of performance or liquidity.
Tested working capital is provided herein solely as supplemental
information with respect to the special installment payment requirements
under the notes. For a description of the tested working capital
requirements under the notes, see the company's Current Report on
Form 8-K/A, dated April 19, 2005. A reconciliation of non-GAAP tested
working capital to GAAP working capital as of September 30, 2005 is set
forth below. 
Tested working capital:
  Cash and cash equivalents                                       $  2,502
  Accounts receivable, net                                           7,914
  Other receivables, included in other current assets                  370
  Less: accounts payable                                            (4,014) 
Tested working capital                                           6,772
Other components of GAAP working capital:
  Restricted cash                                                      333
  Inventories, net                                                   5,145
  Other current assets, excluding other receivables above              416
  Less: current liabilities other than accounts payable            (14,842) 
GAAP working capital (deficit)                                    $ (2,176) 

Gary W. Gray
Verilink Corporation
Contact via

Provider ID: 05099682

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